Wednesday, December 31, 2008

According to lawyers in Florida, reports The New York Times, Westport National Bank may have played a role in steering money to Bernard Madoff:

According to the lawyers, their clients believed for more than a decade that they had an account at the Westport National Bank, a division of Connecticut Community Bank in Westport, from which they had received statements for many years. Early last week, they learned their money had actually been entrusted to Mr. Madoff, the lawyers said.

The lawyers' clients are said to have received statements from the bank showing charges for custodial and record-keeping fees of 4 percent a year.

In 1999, at the request of an unidentified local company, Westport National Bank replaced another financial institution as the custodian for a number of individuals and entities that were investing with Bernard L. Madoff Securities, [Richard Cummings, president of Westport National Bank] said.

"Nearly all of these individuals and entities had been investing with Madoff long before the Bank was founded in 1998," Cummings said.

The custodial agreement "reflected the fact that each custodial client directed the Bank to give Madoff 'full discretionary authority' to invest the custodial client's funds," he said.

"Each custodial client specifically acknowledged in writing that the client had not relied on the Bank in choosing to invest with Madoff," he said.

Tuesday, December 30, 2008

The Ragged Neck Division of the Trust and Wealth Management Marketing blog is pleased to announce the appointment of P. S. Oliver Storm as Chief Risk Officer.

Though still a young kitten, Storm explored every inch of the perimeter of our kitchen and dining areas the other evening. Commendable due diligence.

As for risk assessment, Storm demonstrated extraordinary skill. When a human tapped her finger on the kitchen counter above him, Storm instantly understood the invitation. He crouched, tensed his muscles, crouched even lower, then . . .

"I'm still a little kitten. No way can I jump all the way to that counter top. And when I fall back down, I might not even land on my feet." Storm straightened up, flicked his tail and walked away.

Don't you wish the chief risk officers of our leading financial institutions had possessed Storm's skill at risk analysis?

• • •

We humans lack Storm's finely-tuned instincts. Still, we have a rough idea of physical risks and limitations. Financial risk is what does us in.

To weigh financial risk requires the gathering of facts and figures, the computing of various potential outcomes and then the judging of whether the better potential outcomes are worth risking the bad outcomes. And we humans, most of us, aren't up to the task.

Can anyone doubt that the demands on people to make reasonably intelligent choices with their money has so far exceeded their wisdom to do it, that maybe we should at least try to figure out some way to close the gap? If many presumably sophisticated Madoff investors were ruined, what chance do the rest of us have?

"One lesson of this year," Applebome concludes, "is that these days, no one, even the most financially secure, can afford to be stupid." True enough. But from the times of Tulip Mania and The South Sea Bubble, human stupidity and investing have gone hand in hand.

Monday, December 29, 2008

Big banks call it “flight to quality.” But it is more like flight to a lesser evil. You can go to “your guy” and risk losing everything. Or you can go to a big name and risk losing just part of it.

Some choice.

What's more, some of the big names may have themselves led clients into Madoff's clutches. Ben Stein in the NY Times tells how a wealth-management team from "a major investment bank" tried to get him to move his money to Madoff two years ago. Was the team naive or greedy?Jim Gust suggests that the trust and investment pros at community and midsize banks should be well positioned to gain new clients. New and persuasive marking strategies will be needed. Let's look for worthy ideas in the new year.

Sunday, December 28, 2008

In Terminal event, below, Jim Gust told of the impending death of his wife, Vaiva, on December 13. Vaiva was one of the leading Lithuanian-Americans of her generation, most recently serving as Counselor for Education Matters to Lithuania's President. Her obituary is here. You should also read Jim's addendum, Six degrees of separation.

Friday, December 26, 2008

The year ends, for too many of us, in loss and disappointment. We need a little stardust, right this very minute. . . .

Artless angels spreading cheer have arrived in our mailbox for many a Christmas – each handcrafted and made special by the person who created it.

Louise Cuddihy was the founder's young secretary when I joined The Merrill Anderson Company. She was among the legion of gals who entered advertising and other areas of the New York business world after World War II via the only jobs available to them. Each was determined to type her way up. Most didn't.

Louise did. After work she went to school to study art and design, got her degree, then got another. Merrill gave her a job in the art department. In time Louise became assistant art director, a gal you could rely on for a practical solution to any graphics problem.

When Earl Bergendahl, the art director who created the Mondrian-esque signature format for U.S. Trust's ads, retired, Louise became Merrill Anderson's art director.

Personal note: In 1981, when my wife volunteered us to create and publish a history of the Norwalk Youth Symphony, Louise chipped in with all the layout work.

Louise has been retired for many years. She's enlivened quite a few of them with travel, but I'm glad she hasn't given up art. Her card arrived in today's mail.

Friday, December 19, 2008

Whenever changes to the tax code are "scored" for their impact on federal revenue, estimates are based upon static economic models. Although everyone concedes that tax changes influence taxpayer behavior, no one can agree on how to estimate that change. Tax cuts boost the economy and, ultimately, tax revenue, a vindication of the Reagan vision that those who promote more government spending are unwilling to acknowledge. So, for example, cuts to the capital gains tax rate are always scored as losing revenue, when in fact they have always generated revenue increases as more investors become willing to unlock their gains.

Now one of the long-time opponents of lower taxes and dynamic tax scoring, the New York Times, is asking Did ’97 Tax Break Worsen Housing Bubble? It turns out that when you lower taxes on something, you get more of it, and when you raise taxes on something you get less of it. I wonder who said that first?

Update: Geraldine Fabrikant theorizes that Yale may have fared somewhat better than Harvard because David Swenson allocated less to liquid commodities and may have hedged his positions. Also, a lesser portion of Yale's endowment was in foreign equities, and the Bulldogs used no leverage.

In the settlement, Princeton agreed to pay the heir's legal fees of $40 million, interest of $11 million, and they returned $50 million to the heirs to set up a new foundation. The school keeps the balance ($500 million or more) to use as it pleases, free of the restrictions of the original gift.

Both sides claim victory here, but it seems to me Princeton is really ahead. The message to donors seems to be, stipulations attached to the usage of your charitable gifts will only be advisory. If you really want to control how your money is spent, don't give it away.

Saturday, December 13, 2008

No, it's not something that happens in an airport, it's the phrase that the Surgical PA (which I presume means "surgical physician's assistant") uses to lay the psychological foundation before telling you that you must decide if your beloved wife is going to die.

The management of breaking the bad news would be interesting to study and reflect upon if it wasn't happening to me. They used a committee approach, consisting of the surgeon, his PA, the oncologist, and a social worker. The latter was a woman, to add a dash of estrogen to deliberation. They were pretty efficient and practiced without being too cold or detached. They needed to put rational and emotional into synch, while not appropriating decisional authority to themselves. Not a trivial achievement, especially on regular basis.

Thursday, December 11, 2008

In contrast with this item below, InvestmentNews reports on a survey suggesting that Investors are keeping faith with advisers. No one likes losses, but a majority of those working with advisors believe that their asset allocation planning "held up as well or better than expected" during the market downturn.

Wednesday, December 10, 2008

Whether or not it's a Great Recession, it's scary – for investors and for investment advisers.

How to cope? You might consult a shaman, like the spiritual-healer/wealth-manager The Washington Post magazine profiles in Voodoo Economics. (Read the Editor's Note, too.)

For those seeking a more scientific approach, neuroeconomist Gregory Berns explains how fear impairs decision-making. We're up against what Berns calls "the 'endowment effect,' the innate tendency to value things you own more highly than everyone else does."

The cause and effect have not been fully sorted out, but the implication is that when our brains sense pain, or anticipate loss, we tend to hold onto what we have. When everyone does this at once, the result is a downward economic spiral.

To help their clients cope, investment advisers should avoid undue pessimism and help clients tune out "media that fan the emotional flames." For clients in their 40s and 50s, times when stocks are marked down 40% should logically be greeted as a rare opportunity, not cause for panic. Do they really believe the stock market is Going Out of Business?

Berns advises against waiting for the economy to get back to normal:

I don't care what your business is, but if you think it will eventually come back to what it was — your brain is in the grips of the fear-based endowment effect. What I am doing is looking for new opportunities.

What opportunities should corporate fiduciaries be exploring? The answer may involve finding ways to bring fiduciary-standard investment service to more people or different organizations. Or maybe it means becoming a provider of education and insight rather than mere portfolio management. Or . . . [you fill in the blank].

Sunday, December 07, 2008

Merrill Anderson is surveying the users of its Investment and Trust Newsletter to develop the calendar and editorial direction for the coming year. We ask about conditions in the industry as well, and share the results with our clients.

We asked what the best sources of trust referrals are. 100% of the respondents so far have checked off centers of influence (attorneys and accountants), while 36% mention internal referrals and 18% get good referrals from existing clients.

Trust departments are well positioned to gain market share from the current financial mess. 90% agreed that Clients are now looking for traditional values, such as ours.

Remember last year's tax rebate checks? Congress passed the law early in the year, but IRS had to handle the tax filing season first, so no checks could be cut before May. Then we had all sorts of complications, and tremendous IRS resources wasted just answering taxpayer questions. Ultimately the "stimulus" fell short of the promises made for it.

A tax holiday is simpler, and it's immediate. No IRS overhead in implementation. It would inject real stimulus into the economy, but there' s no chance for Congress to manipulate who gets what. I expect the proposal therefore to be DOA.

History shows that the best way to rebuild portfolios is to stay in the stock market. Over the past nine recessions, the Standard & Poor's 500-stock index has gained 13%, on average, during the second half of a downturn and another 13% the year after it ended.

Thursday, December 04, 2008

Harvard's investment return for the twelve months ending last June exceeded Yale's. Now the owner of the largest university endowment is preparing to tighten its belt because of a 22% loss in the subsequent four months. Also, Harvard and less wealthy universities are striving to divest themselves of various alternative assets.

Last year, when the family needed to add to its cash reserves, we sold shares of Apple. The shares had been purchased for under $10 per share (split adjusted) back in the dot.com bust, so the capital gain was humongous.

We had little in the way of investment losses to offset the gain (remember those days?). Still, the federal income tax on long-term gain is no more than 15%. Could be worse.

It was worse. At tax time we discovered that, except for people with exceptionally large incomes, long-term gain is not truly exempt from the Alternative Minimum Tax. The result, as explained here, was to boost the tax on our Apple gain to around 22%.

Oh, well. It could have been worse.

And it is. As senior citizens, my wife and I recently received polite notes from a Social Security computer, announcing a boost in our retirement benefits to offset inflation, negated by a significant cut in the benefits we would actually receive in 2009.

The cut results from a surcharge – the SS computer calls it "an income-related monthly adjustment amount" – on the premium we pay for Medicare Part B. The surcharge is based on MAGI:

We ask the Internal Revenue Service (IRS) for your tax [sic] income. We then add your adjusted gross income together with your tax-exempt interest income to get an amount that we call modified adjusted gross income (MAGI) . . . .

MAGI may include one-time only income, such as capital gains . . . . One-time income will effect your Medicare Part B premium for only one year.

Thanks to the humongous capital gain, our MAGI results in surcharges for 2009 equal to another two-percent tax on the gain. That brings the overall tax rate to 24%.

During the election campaign, weren't the Democrats talking about a 20% capital-gains tax? Sounds good to me!